The Independent Investor: To Roll, or Not to Roll Your 401(k)
Rolling your 401(k) or 403(b) into an IRA can be a good idea for some savers but not for others. Here are some things to think about before you make a decision.
In my last column, I outlined some of the more obvious reasons for rolling over your retirement accounts: cost savings, larger selections of investment choices, more flexibility. I also discussed some of the cons against rolling it over: the ability to borrow against your 401(k), a lower age for beginning distributions from your 401(k) (55, versus 59 ½ for an IRA), the ability to delay minimum required distributions after 70 1/2, if you are still working.
This week, I want to focus on one of the greatest weaknesses of just about all employee tax-deferred retirement accounts. When the public and private sector came up with the concept of tax-deferred retirement accounts to replace pension funds, they forgot one extremely important detail. Pension funds for a company's employees were managed by full-time professionals.
That makes sense because managing retirement savings is a full-time job. Unfortunately, the government ignored that fact when they gave the responsibility of managing tax-deferred retirement savings to the worker. Few workers are qualified to do that. They are totally focused on the full-time job of making a living, getting ahead and providing for one's family, as they should be.
Even if they had the education, knowledge and skill to manage money, (which most don't), they have few resources to do that job successfully. And as years of contributions have accumulated, many retirees now have hundreds of thousands of dollars (if not millions) invested in these employee-sponsored plans.
At the same time, the financial markets have changed enormously. It is a world of derivatives, leveraged investments and the commoditization of everything from individual stocks to Bitcoin, the individual investor is increasingly outgunned.
As a result, most 401(k) contributions are funneled into funds that automatically change your exposure to bonds and stocks based on the date you plan to retire. These target date retirement funds tend to be expensive and have a number of unintended consequences. One of which is that the closer you get to retiring, the more bonds are added to your portfolio (since bonds are considered a safer investment). In an environment where interest rates are rising and bond prices are falling, however these "safe" investments are fraught with risk.
In today's constantly-changing, global financial markets, the set-it- and-forget-it approach to investments does not work very well, just witness the debacle in losses back in 2008-2009 to most savers' 401(k) assets.
By rolling over your 401(k) to an IRA, the option of professional money management becomes available. It is one of the reasons that brokers, annuity salesmen and investment advisers are so focused on the area. This "gold rush" by the financial community to manage these assets has led to a myriad of abuses. Unscrupulous brokers, financial planners and advisers have stuffed these rollover accounts with high-priced investments with sub-par returns that have generated big commissions and fees for their firms while stiffing the poor retirees.
Worst of all, countless elderly retirees have been sold annuity products that are not federally-insured or regulated. These restrictive investments are inappropriate for the vast majority of savors. They command some of the highest fees of almost any investment product (as much as 15-20 percent of the entire investment over the lifetime of the annuity contract). What's
worse, if you try to sell them (as many do) they are saddled with huge penalties for years.
Money management, on its own, is no panacea; there are good advisers and bad ones, so you still need to do your due diligence. Make sure that whoever you select is registered, is a fiduciary and, if possible, offers more than just money management. In planning for retirement there are a number of other areas besides money management that are important, everything from financial and estate planning to Medicare, Social Security and elder care issues.
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@theMarket: Here Comes Santa
With less than two weeks until Santa Claus shimmies down your chimney, investors are betting that what the Big Man has in his sack is lots and lots of gains to finish out 2017.
Now some might say that the signing of a massive tax cut is all the present investors need. After all, despite the rhetoric, we all know that the Republican tax cut is solely directed toward the wealthy, big business, and the stock market. As such, the indexes should continue to levitate between now and the New Year.
Investors are stocking up on the shares of those companies that will benefit most from the windfall profits they will receive as part of the reduction in the corporate tax rate from 35 percent to around 21 percent. Many of these Fortune 500 companies, such as Cisco Systems, Pfizer Inc. and Coca-Cola, have already said they will turn over their tax cut gains to shareholders.
Jamie Dimon, JP Morgan Chase Chairman and CEO, says companies will buy other companies, raise their dividends and buy back stock. Some may even raise wages, he added, as an afterthought. These stated plans fly in the face of claims by President Trump and Republican lawmakers. They have promised that corporations will invest this money in plant and equipment, use the funds to raise wages, and hire new workers-- none of those statements appear to be true.
The very politicians who decry "fake news" have been working overtime to spread their own brand of this dubious commodity.
Since my focus has always been on the economy and financial markets, I see some troubling ramifications of this tax cut for the future. As readers know, the U.S. economy as well as the global economy, has been picking up steam. Our economy should finish the year with a gain of between 2.3-2.5 percent. The global economy will do better (3.4 percent or so). Next year should see our economy nudge up to 2.9 percent while worldwide growth should hit 3.7 percent. This is before the effect of any tax cut.
Now, the political rhetoric maintains that we should see our economy explode next year, based on all this corporate tax cut money. Yet, few economists outside of those paid by the GOP to come up with rosy forecasts, see much evidence that the tax cut will have any impact on growth next year. But let's say the Republicans and their president are correct; what happens
There is a high probability that the Federal Reserve Bank, which would then be headed by Trump appointees (who are decidedly more hawkish than the Yellen crowd), would be forced to hike interest rates sharply in order to stave off any inflation threat. This is an especially clear and present danger, if all this supposed new growth creates job openings in an economy that is already at an historic low rate of unemployment.
As it is, corporations still cannot fill many of the job vacancies they have because they can't find enough skilled labor. Even if the Fortune 500 embarked on a massive job training drive, it will be several years before the first graduates could fill the existing job openings. In the meantime, a bidding war could ensue, sparking unbridled wage growth. The Fed wouldn't like that either.
These would be luxury problems as far as the economy is concerned. The stock market, on the other hand, might see it differently. The good news, however, is that these potential scenarios will not appear until at least the second half of next year, if they do at all. In the meantime, I expect we will see future gains into the first half of 2018.
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The Independent Investor: Should You Roll Your 401(k) Into an IRA?
Some retiring workers roll their 401(k) tax-deferred savings account into an Individual Retirement Account (IRA). There are good reasons to do so. But for those who are not retiring, the decision is not so clear cut. Here are some pros and cons to ponder.
In my neighborhood, for example, a local company with more than 300 employees is being acquired by another company from Chicago. As a result, the employees of the acquired company are being offered a choice: they can roll over their existing 401(k) into a new plan offered by the Chicago company, roll their 401(k) into an IRA, or just take the money out, pay taxes and spend it.
Obviously, the last option is the worst choice. The tax bill on such a lump sum would be quite large and if the employee is not yet 55 years old, an additional 10 percent tax penalty would be levied on the money as well. So let's assume that you are a rational human being who can see that option would be financial suicide.
The two most obvious reasons to roll over your money into an IRA is that you suddenly have an entire universe of investment options to choose from instead of the typical 10-20 choices normally listed in a company 401(k) menu. The second reason is that you will have more control over your retirement funds. You may, for example, identify better performing funds with lower costs. If the markets take a tumble, you can step aside, rather than stay invested.
Sometimes, you can also reduce costs, while at the same time improving your performance. Few 401(k)'s offer the option to invest in index based exchange-traded funds (ETFs). Some of those ETFs charge a lot less than some mutual funds. This can be especially important to someone who contributes regularly to their plan over two to three decades. Studies have shown that in the past, total fees and expenses can amount to as much as 33 percent of your total retirement assets over a 25-year period.
However, some large companies with billions of dollars of assets in their employee 401(k)s have access to institutional-class funds that charge lower fees than their retail counterparts. Your choice of investments is still limited, but at least your costs are lower.
But there are other reasons, depending on your circumstances to simply roll over your 401(k) to another one. Some 401(k) plans offer stable-value funds, which are a low-risk option for an extremely conservative investor. These funds provide an attractive alternative to a typical money market fund. And unlike pure bond funds, they won't get decimated if interest rates rise.
Sticking with a 401(k) is also the best option if you plan to retire early. If you roll your money into an IRA and plan to start withdrawing before the age of 59 1/2 years old, you will be charged a 10 percent penalty by the IRS. In a 401(k) plan, workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals. In both cases, however, you will still have to pay regular income taxes on your withdrawals. You can also take out a loan against your 401(k) but not from your IRA.
On the other end of the spectrum are guys like me, who don't ever plan to retire. Ordinarily, at age 70 1/2, I would be required to take a required minimum distribution (RMD) from both my IRA and 401(k). If I continue to work past that age, however, not only can I continue to contribute but I am not required to take an RMD from my company 401(k).
In my next column, I will discuss additional positives and negatives as well as some real life examples of those who have opted for one over the other. Clearly, this is a complicated subject that requires analysis and direction. It would be a good idea to seek outside professional advice. If you do so, make sure you ask an adviser who is a registered fiduciary that puts your best interest above herself and her company's.
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@theMarket: Should Be Good Month for Stocks
The House passed a stop-gap spending bill averting a government shut-down late Thursday night. As a result, markets moved higher. We can expect more of the same until the next deadline, which is just before Christmas.
To be honest, investors have become so used to these eleventh hour deals out of Congress that the markets hardly budge when the drama begins. Dec. 22 is the new date investors will be watching. We will see whether a compromise can be reached on the budget for 2018 by then.
In the meantime, the markets will remain focused on the Republican tax deal. The hope is that a compromise between the House and Senate will be reached in time for President Trump to sign it into law by Christmas. The stop-gap move by the House now frees the decks for legislators to focus on tax reform between now and then.
Next week, the Fed meets again. Investors are expecting another Fed Funds rate hike by the end of the FOMC meeting next Wednesday. That will make three this year. There should be no surprises there, since traders have been expecting such a rate hike for weeks now. The only risk may be if Janet Yellen, the Fed chairwoman, says something unexpected during her remarks after the announcement.
In the meantime, the markets are seeing quite a bit of rotational activity. While the indexes may appear to be simply consolidating across time, individual stocks and sectors are undergoing some gut-wrenching moves. This week energy, financials, technology and utilities, among others, have seen their values gyrate based on what investors perceive as under or overvalued.
At the same time, overseas markets have been correcting as well. Emerging markets and Europe, over all, have seen 2-3 percent declines recently as investors are taking some profits in those areas. Stock markets there have done exceptionally well this year. The truth is that foreign markets have been outperforming the U.S. markets ever since the elections.
Some pundits are worried by the price action. Since foreign markets have led the U.S. stock market up in price action this year, their present declines may be a forerunner of future declines here at home. If so, I do not believe we will see any fall out until January at the earliest. There are just too many seasonable and fundamental factors that will keep U.S. markets propped up or gaining for the rest of the year.
Tax reform itself has contributed mightily to the lack of tax loss selling this season. This has provided a great deal of support to the averages and will continue to do so until the end of 2017. And then there is the Santa Claus Rally that will soon be upon us.
Combined with a good economy, low interest rates, and low unemployment, this gives most investors few reasons to sell.
As a result, the stock market should close out the year at these levels or higher. Next year may not be as positive, but we will worry about that when the time comes. In the meantime, count your shekels.
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The Independent Investor: Will the Lights Go Out?
The deadline looms. There is no deal in sight. Various political factions are jockeying to get their demands met. It is all part of an annual compromise to fund the government for another year.
So what else is new?
If the government does shut down on Saturday morning, it will be the 18th such occurrence in U.S. history. In every case, the nation has survived, although at times the cost has been great. There was, for example, a 16-day shutdown back in 2013 that resulted in a $24 billion hit to economic output and caused 850,000 workers to be laid off.
We all know it costs the American people more to shut down the government than it does to keep it open. In this age of partisan politics, where compromise is a rare commodity, the drama of a government shutdown goes on year after year. At the 11th hour, a series of horse trades normally occurs, allowing both sides to kick the can down the road for a little while longer until the next deadline looms.
You might have thought that with a Republican-controlled House, Senate and presidency, that passing a spending bill would have been smooth sailing. Far from it, readers may recall that in years past, the Republicans have controlled the House, but the threat of closing the government occurred anyway. That's because there are so many splinter groups within the GOP that there is always someone or some faction that insists on more or less spending; usually more on defense and less on everything
In the Senate, although the Republicans hold the majority of seats (52), you still need 60 votes to pass a spending bill. That requires the cooperation of eight Democratic Senators. To get their votes, the Democratic leadership wants legislation passed that would protect "The Dreamers" from deportation. Those 700,000-plus illegal immigrants who were brought to the U.S. as young children and are now caught up in the web of President Trump's animosity towards all immigrants, legal or otherwise.
The Democrats also want to reverse Trump's decision to halt monthly subsidy payments to insurance companies offering health care to low-income people. Those demands fly in the face of ultraright Republicans, many of whom want spending cut (except for defense) in all social programs, especially those involving Obamacare and immigrants.
Thursday, President Trump and Republican congressional leaders were meeting with Chuck Schumer, the Senate's Democratic Leader, and Nancy Pelosi, his counterpart within the House.
The betting is that they will all agree to disagree, but extend the existing spending bill by two weeks.
That would enable the GOP to finish up their tax package before re-focusing on a spending plan.
If so, that would simply kick the can down the road to just before Christmas. Given that only 18 percent of voters would go along with even a temporary shutdown of the government, the hope is that our legislators would be loath to cause a shutdown during the holiday season.
I am not sure I agree with that. The Republicans seem oblivious to voter sentiment. Their tax bill has less than a 30 percent approval rating among Americans, who rightly believe the "tax cuts" benefit the rich and corporations, while savaging most other Americans. Both the president and his party have their own end game, which does not include the majority of voters.
However, even if we do see another shutdown, the impact will be short-lived both for the economy and the markets. Maybe that is what the Republicans are counting on.
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